Desirable deleveraging and inevitable growth slowdown

Late last night, a good friend sent me a link to a news-story. The Vice-Chairman of NITI Aayog has blamed Raghuram Rajan, former Governor of RBI, for India’s economic growth challenges, notwithstanding the fact that India recorded a 8+% real GDP growth (y/y) in 2018Q2 or 2018-19Q1. I do not believe in the latest CSO numbers post 2011-12 base year change and other revisions to the methodology made. The new GDP numbers are as problematic as the old one is, except in different ways.

In theory, deleveraging can reduce economic growth and it does. As a factual statement, it is correct. As a ‘pass the buck’ statement, it is problematic. But, if one listened to the actual clip (barely 85 seconds), he does not blame. He states the deleveraging matter-of-factly.

However, Andy Mukherjee sent me the link to his interview to ‘’ wherein he blames the former RBI Governor more directly:

“When you give crocin to an ill person every two hours instead of the prescribed eight, then the person will become comatose,” said Kumar. [Link]

The clip that is available on the site does not feature this comment, however. Perhaps, there is a fuller clip elsewhere which has this comment. But, he is right that the economy was slowing down already before demonetisation happened.

Below are the growth rates from the quarter ending March 2016 to September 2017. He is right about the slowdown having set in before demonetisation. But, will it have continued to drop further but for demonetisation? Hard to prove one way or the other.

9.3 8.1 7.6 6.8 6.1 5.6 6.3

I would like to draw the attention of the readers of this blog to my column published in August 2017 on Mr. Rajiv Kumar’s views on foreign and local talents for policymaking posts.

Before I could write a blog post, Andy Mukherjee had deconstructed the imputed statement of the Vice-Chairperson of NITI Aayog.  Andy Mukherjee makes the point that commercial credit was growing at 10.8% (y/y) when Raghuram Rajan demitted office in September 2016. But, Rajiv Kumar, in the ANI clip, mentioned industrial credit growth and he had got his facts right.

Industrial (overall) credit growth in Sept. 2016 was 0.9% (y/y). Growth in credit to micro&small, medium and large industries were -1.2%, -2.6% and 1.4% respectively, in September 2016.

Perusing BIS statistics on Credit-to-GDP gap (actual-trend), one notes the following, for India:

2012 2013 2014 2015 2016 Q4 16 Q1 17 Q2 17 Q3 17 Q4 17
1.6 -0.1 -3.2 -3.8 -8.1 -8.1 -6.3 -9.0 -8.0 -8.7

India’s credit-GDP gap (actual-trend) had turned negative in 2014 and it remains negative up to 2017Q4 (latest data available in BIS). Therefore, the credit growth had slowed well before Dr. Rajan ordered AQR and directed banks to come clean. Banks had turned cautious because they knew that they were sitting on a problem and the borrowers too had severe credit indigestion. It was a demand as well as a supply issue.

So, the real problems were not the essential deleveraging nor the directive to clean up the balance sheet. Both were needed. Rajiv Kumar was not portraying the former Governor in a bad light. In fact, he does say to Jyoti Malhotra at ‘’, that it was a ‘heroic attempt’ by Dr. Rajan to clean up the banks.

Indeed, the real reason for the credit growth slowdown (desirable) and economic growth slowdown (inevitable) was the unsustainable credit and economic growth up to 2011. The Prime Minister was right to draw attention to the ‘phone-a-loan’ scam under the previous government.

So, in that spirit, if I were the Government, I would have put out the following press release after the RBI Annual Report came out, showing the return of the majority of demonetised currency notes to RBI:

“We undertook the demonetisation exercise to either smoke out black money and to gather precious information. The fact that 99.3% of the currency notes came back is not a source of disappointment to us but a source of information. Together with technology and returns being filed under GST, we are on the path to ensuring that more citizens pay their legitimate tax dues to the government, without harassing them, such that development priorities get the funding they need.

We sanctioned and fully stood behind RBI to facilitate Asset Quality Reviews at Banks and we backed the attempts to get to the bottom of the problem of Non-Performing Assets. Those efforts are paying off now. We implemented the Insolvency and Bankruptcy code to allow ease of exit of businesses and creditors as much as the Government was focused on Ease of Entering and Doing Business and we introduced the Goods and Service Tax to make India an efficient and an integrated market, scaleable for businesses and employment generation.

All of these would entail short-term sacrifices. But, we have put India on a higher growth path. Recent IMF review of the Indian economy has put India’s economic growth potential at 7.25%, capable of rising to 7.75%.

In 2012, India’s growth potential had dropped to 6.6% We have, with all these structural measures, raised it back above 7%. With our steadfast attempts at cleansing our banks, to be followed by a better framework for their future management, with our focus on creating hard infrastructure and with the financial inclusion measures we have undertaken, we are confident that India’s potential growth will rise to 8% and beyond that.

All important victories are hard-earned. Nothing worth cherishing comes easy or handed to us on a platter. We were handed a poisoned chalice in 2014. We have worked hard to make it a nectar. That involves short-term growth and even political sacrifices. We are happy and proud we did not flinch from taking the necessary and short-term unpopular decisions. Our efforts are paying off. The economy is on a solid growth path. We have achieved over 8% growth in the first quarter of the current financial year. Better times lie ahead.

We have had a good monsoon. We are now focusing on redressing the enduring concerns of our farmers and the fundamental priorities of the farm sector, in general. We are empowering farmers. That is our priority. At the same time, we are not losing sight of medium-term economic stability as we approach the elections next year. Thank you.”

When I shared the above draft government ‘press release’ with a friend, he told me the following:

Governments prefer to be hated for the wrong reasons than speak the wholesome truth, which admits errors of judgement in good faith. And they will never understand that people value honesty so much that they forgive honest mistakes!

Brilliant! Could not have put it any better.

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